Thread: how to amortize incorporation costs?

how to amortize incorporation costs?

Incorporation costs are intangible assets (also qualifies as eligible capital expenditure) and depreciate over its useful life. Which amortization method should be used to calculate the amount that would be entered into "Accumulated Amortization-Intangibles" account? At year-end, this amount will be added back to the income and ECE/CCA will be deducted. Then I go back and post adjusting journal entries to reflect the balance of the accumulated amortization-intangibles?

Or do we used the cumulative eligible capital right from the start to calculated the amortization of the incorporation costs and then post that amount to "Accumulated Amortization-Intangibles" account?

Just curious, why not just expense incorporation costs in your first year of business. If you happen not to make any money in your first year you can just carry the loss forward to future tax years.

Going through the trouble to track something that only costs $262 dollars in my province seems like it would cost more to track over time than to just expense it. The $262 of course doesn't include the cost of the binder, bylaws, seal and shares which could be taken as office expenses as well.

My non answer is to get an accountant. Capital depreciation has a lot of rules, with different types of equipment depreciating at different rates (like computers depreciate faster than furniture). I'm sure that you could figure it all out, but I found it easier to just pay the accountant. There's a million reasons to use an accountant, this is one of them.

Incorporation costs are intangible assets (also qualifies as eligible capital expenditure) and depreciate over its useful life. Which amortization method should be used to calculate the amount that would be entered into "Accumulated Amortization-Intangibles" account? At year-end, this amount will be added back to the income and ECE/CCA will be deducted. Then I go back and post adjusting journal entries to reflect the balance of the accumulated amortization-intangibles?

Or do we used the cumulative eligible capital right from the start to calculated the amortization of the incorporation costs and then post that amount to "Accumulated Amortization-Intangibles" account?

If your amortization policy is different from what is allowable under tax rules than you will always have a difference between accounting net income and taxable income. There is no need to adjust the acc. amort account to match the tax account. You may also have a future tax asset/liability due to these 2 different expenses.

If you just set your accounting amortization policy to be the same as the tax amortization, then you won't have to deal with 2 sets of accounts. Just use the CEC balance and deduct the same amounts for tax and accounting (my opinion... for ~200$ it is really not worth spending much time on this).

Just curious, why not just expense incorporation costs in your first year of business. If you happen not to make any money in your first year you can just carry the loss forward to future tax years.

Going through the trouble to track something that only costs $262 dollars in my province seems like it would cost more to track over time than to just expense it. The $262 of course doesn't include the cost of the binder, bylaws, seal and shares which could be taken as office expenses as well.

Just my 2 cents.

I fully agree, even if it is a deviation from what is required. Common sense takes priority. My accountant says do not bother with CCA for anything less that 200-300 dollars.

1. its (most likely) immaterial and theres really no reason to set up as an asset
2. now you have an extra useless line item on your balance sheet
3. your taking the time to find out and adjust for any CEC deductions
4. The immateriality of the amount itself speaks to the immateriality of any future income taxes associated

so should just write off but still put into the CEC pool

that would have been the easiest, and follows both accounting and taxation rules

Unfortunately, some people erroneously use the term "write-off" for most claims or journal entries,

what does this even mean? when i say write off the incorp costs as opposed to capitalizing them that is the correct terminology. Just because its an accounting writeoff doesn't mean its a tax write off

As for slavka012's post, if an accountant ever told me that I should not worry about depreciating items under $200-$300, I would fire them immediately! Everyone knows that its the little things that can add up over time. Perhaps the accountant just wants to save himself the time and effort of keeping track of things. After all, its not HIS money that he's saving.

Well actually it is saving my time, primarily. I buy a $30 label printer and I want to expense it over 5 years (or whatever number of years) and keep track of it? Hell, no! I happen to need a lot of small items like this in my business. Tax wise, it makes little difference for me, but not having to keep track of all this stuff is a big deal.

So if I ever get audited, and questioned about this practice I'd be happy to explain and pay 300-400 in fines. Time I saved cost more anyway.

As for slavka012's post, if an accountant ever told me that I should not worry about depreciating items under $200-$300, I would fire them immediately! Everyone knows that its the little things that can add up over time. Perhaps the accountant just wants to save himself the time and effort of keeping track of things. After all, its not HIS money that he's saving.

As an auditor I can say that almost every company I have audited, the capitalization policy states that only items worth over $500/$1,000 and have a useful life of 3/5/10 years will be capitalized. Everything else is just expensed.

You are right, little things add up over time. Can you imagine the overtime you would have to pay your accountant if you wanted him to properly amortize items under $200?

This is anexample of the Cost-Benefit principle. If the cost of doing something (amortizing under $200) outweighs the benefits (SLIGHTLY more accurate records), you shouldn't be doing it.

To OP, I believe I read somewhere that incorporation costs don't need to be amortized as long as the going concern assumption holds true (the business will continue indefinitely into the future).

As an auditor I can say that almost every company I have audited, the capitalization policy states that only items worth over $500/$1,000 and have a useful life of 3/5/10 years will be capitalized. Everything else is just expensed.

your a public accountant not a CRA auditor though right?
so although a company's policy may state one thing .. the tax act may state another

but that being said what you said about cost benefit not only applies to the company but to the CRA as well. They are not gonna send out a staff member to audit a couple bucks of deducted capital items, they have a cost/benefit as well with staff wages etc. and dollar return on tax/penalty recouped

Originally Posted by BillMoocho

To OP, I believe I read somewhere that incorporation costs don't need to be amortized as long as the going concern assumption holds true (the business will continue indefinitely into the future).

this is correct. Incorp costs have inherent value for as long as the business operates therefore their useful life is indefinite (as a going concern). Therefore not amortized until the situation changes. Again so much easier to just write off since its prob a small amount.

As for slavka012's post, if an accountant ever told me that I should not worry about depreciating items under $200-$300, I would fire them immediately! Everyone knows that its the little things that can add up over time. Perhaps the accountant just wants to save himself the time and effort of keeping track of things. After all, its not HIS money that he's saving.

If an accountant told you not to amortize a $200 item, you should probably listen to them. It saves them time and effort, which in turn, saves you money (less time they spend on your file = less money you have to pay them).

Incorporation costs or any other computer equipment (i.e. CCA Class 10 or 45) should be treated for what they are - assets that have future benefits, regardless of their costs. Amortization is perceived at the pedestrian level to be depreciation, but that isn't the case entirely. Amortization is the process of allocating the cost of the assets to the periods of its beneficial use. Both accounting amortization and tax amortization achieve this.

While Incorporation costs could be deducted in the year of insurance on the T2 tax form because they are immaterial in nature, many accountants will not do so as it's an act of tax evasion. Accountant/Preparer CRA penalties are the greater of $1,000, or 50% of the client tax payable avoided. The client will also be assessed penalties at 5% of the tax owing plus 1% for each month afterwards for a maximum of 17%. Don't forget the interest.

First of all IANAA (I am not an accountant). What I have found in this interpretation bulletin indicates that incorporation expenses are 'eligible capital expenses': http://www.cra-arc.gc.ca/E/pub/tp/it143r3/it143r3-e.txt. CRA they suggested the GIFI code for incorporation expenses should be 8860 i.e. professional fees. Also there doesn't seem to be a CCA class for this, but they indicated to use Schedule 10, Cumulative Eligible Capital Deduction (7% rate). Hope this helps others trying to sort this out, as the info out there for this topic is pretty sparse.